Tax planning in Spain

Tax planning in Spain When planning your move to Spain, it is important to be aware of the different tax treatments there compared with the UK and have an advisor you can turn to who understands the differences, and the interaction (via Double Tax Treaties), between the two regimes.

In Spain, you are tax resident if you spend more than 183 days there during the Spanish tax year (the calendar year) or if your main professional activity or most of your assets are based in Spain (i.e. if your centre of economic interest is in Spain). You can also be resident in Spain if your spouse and/or dependent minor children live in Spain (unless you can prove otherwise).

A Spanish tax resident pays tax on his worldwide income in Spain whilst a non-resident only pays tax on Spanish source income.

Tax is complicated enough, but is made more complicated in Spain by the fact there are 17 autonomous regions, each with a degree of control over tax rates. Taxpayers in Spain are therefore affected by two annual government budgets: the state budget and the regional one. Each of the regions can adjust the local element of income tax rates and adapt rates and allowances for wealth tax and succession tax, which in terms of the latter, can lead to huge differences in rates. 

Income tax

Spain’s political stalemate meant that state income tax rates had not changed for three years. Finally, in December 2020, agreement was reached with new rates effective from 1st January 2021.

Most regions start with a combined rate of approximately 19% with the rates then rising through the tax bands, reaching top rates in the key expatriate regions of between 45.5% (Madrid) and 54% (Valenciana). Previously, the top rate of personal income tax applied to income over €120,000 but, this year, the government introduced a new income tax rate band for general earnings over €300,000. 

Tax on savings income

Savings income is taxed separately to general income and consists of rental income, interest income, dividend income, income derived from life assurance contracts, purchased annuity income and capital gains on the sale or transfer of assets.

The tax rate starts at 19% and used to peak at 23% for savings income exceeding €50,000 but, this year, a new 26% rate has been introduced for savings income exceeding €200,000.

Wealth tax

Worldwide wealth up to almost €10.7 million is taxed with rates rising progressively from 0.2% for wealth up to €167,129 to 2.1% for wealth between €5,347,998 and €10,695,996. But, from this year, the top state rate for wealth above this limit has increased from 2.5% to 3.5%.

However, this increase only applies where the local autonomous community does not apply its own rates. Where it does, these continue to apply (and may or may not change from 2020, depending on the regional 2021 budget).

Madrid currently applies a 100% relief of the wealth tax due, which effectively means that residents of the region do not pay any wealth tax at all.

UK-residents earning income in Spain

UK residents should note that third-state nationals (those from outside the EU) are taxed at a higher rate than EU/EEA nationals.

So, since Brexit, UK residents earning rental income from a Spanish property will now pay Spanish income tax at 24% instead of 19%. You may well also be paying Spanish savings tax on a larger amount, as non-EU residents can no longer offset the expenses involved in maintaining and renting out the property. 

Selling your UK home when you move to Spain

Many people do not sell their UK home at the same time as they move to Spain – some wait until they are settled in their new home or even longer. The timing of the sale of your UK home could expose you not only to some capital gains tax in the UK on the sale, but it could also result in a tax liability in Spain.

There is a lot to take in and be aware of and these are really only examples. Good planning can ensure you minimise the tax that impacts you and it helps to do so with specialists in this area. 

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.